By The Wyoming LLC Attorney TeamJun 03, 2022
The article specifically focuses on New Mexico's corporate taxes, outlining the federal taxes that corporations must pay, including income tax, tax on dividends, state franchise tax, gross receipts tax, and state income tax. It provides information on tax-deductible expenses that corporations can utilize to reduce their taxable profits.
A corporation tax is a direct tax on a company’s profits taken at the state and federal level. This is different from an LLC or S Corp taxed as pass-through entities, and the members declare the company's profits on their personal returns.
All corporations are taxed in some way, but there are a number of deductions they can exclude from their profits such as research and development, routine business expenses, cost of goods, general administration expenses, depreciation, and operating expenses. For those who dislike this complexity, an LLC should be considered given its tax flexibility and other benefits.
In the United States since 2018, the flat rate for corporate tax is 21%, but this can fluctuate depending on the administration. Previously the tax rate was at 35%. This doesn’t, however, mean that all corporations pay a flat 21% across the board as there are deductions, loopholes, and subsidies that different businesses are allowed to take which effectively lower this rate. This happens at both the federal and state levels, though each state’s tax rate will vary based on their laws and the corporation’s size.
Though most individuals are required to have their taxes filed by April 15, the deadline for corporations is one month earlier, March 15. It’s possible to request an extension or to break up corporate tax payments on a quarterly or monthly basis to better accommodate the business. All corporations are required to file IRS Form 1120 each year to remain in compliance.
Since corporations are treated like individuals in the eyes of the law, their income is taxed in a similar manner as individuals. It is an important way for the US and state governments to generate income, making up around a third of the federal revenue.
There are two federal taxes that have to be paid by corporations, though some of these will not be applicable due to the nature or size of the business.
All corporations must pay tax on the salaries and bonuses they pay out to their employees or shareholders. There are many deductions available to lower the standard rate of corporate income tax.
Dividends are viewed separately from salary and bonuses for tax purposes and are subject to being taxed by the corporation who pays them out, and the shareholders who receive them. This makes dividends subject to double taxation. There are no deductions available for dividends.
This is sometimes called a privilege tax and not all states levy it. In New Mexico, this is a flat $50 fee paid by all corporations while in other states the fee is based on the net worth of the company.
This tax doesn’t apply to all corporations, but in some cases, you are given the choice to pay a gross receipts tax instead of a state income tax if you sell taxable consumer goods. If a company meets certain criteria it can elect to pay 75% of its gross receipts in lieu of a state income tax.
New Mexico requires its own state income tax which is taxed at marginal rates. Currently, if your corporation’s net income is under $500,000 you will be charged a 4.8% rate, and if your net income is over $500,000 you will be charged a flat fee of $24,000, plus a 4.8% rate on all income over $500,000.
One important thing to consider when forming a corporation is the taxes that you will have to pay each year. We often get the question:
Are corporate taxes the same in every state?
There are some corporate taxes that are the same in every state, though each state will have its own corporate taxes it imposes. In the state of New Mexico, corporations are required to pay the following additional taxes.
It may seem that the tax rates for corporations are so high that it wouldn’t be worth doing business. However, there are a number of deductions that corporations can take to reduce their taxable profits, significantly reducing the net income they have to pay taxes on. Corporations can lower their effective tax rate by reducing this number and reducing the amount of dividend distributions.
Many corporations work with skilled financial and tax law professionals to structure their business in such a way as to maximize these deductions. We highly recommend partnering with the seasoned professionals at Bench. As our trusted ally, Bench is ready to lend its expertise to help you organize your financial records, maximize deductions, and streamline the filing process for a seamless and efficient experience this year.
Tax Deductions in New Mexico:
Forming your business as a corporation offers numerous advantages to the shareholders, the primary among them is the limited liability nature of the structure. This means that the individual members are shielded from any lawsuits, liabilities, or losses that the corporation may face.
They will not be held personally responsible for these and thereby protect their individual assets. This allows the members to share in the profits without fear of severe losses. Having a corporation also adds validity to your business and sets you up for success in competitive markets.